Giant Chinese developers take over small projects
Posted on September 22, 2008
Filed Under Actual
Small-scale developers in China are in financial trouble. As such, many of them have sold their small projects to large developers so as to survive amidst the liquidity credit crisis that has hit China over the past few months.
China’s large developers have spent billions of US dollars to buy property projects being built by small developers. Last year, at least 50,000 small developers obtained big amounts of bank loans but later they failed to repay them in credits. So they had no choice other than selling their projects.
Vincent Lo, property tycoon and leader of a Chinese conglomerate grouped in China Central Properties (CPP) spent US$700 million to buy a number of small projects that their developers would not be able to complete. In July 2007, Lo took over Ruiqi Building, an unfinished big property project that that would include office sections, luxurious apartments and retail compounds in Chogqing.
CPP bought the 925,000-square feet project at US$60 million. Lo was sure that the Chinese property sector would have much bigger opportunities in the future. He said that if the construction of Ruiqi Building could be completed by mid-2009 they would gain quite big profits. “Last year, when the market was hot, everyone thought they could make a pot of gold. But this year, they see that isn’t true. This shaking out is going to move the industry in the right direction,” Lo was quoted by propertywire.com as saying.
Ren Zhiqiang, president of the Beijing-based Huayuan Group, is also optimistic. He even sees that the Chinese property sector will continue to thrive in a long period of time in the future. “So long as the fundamentals of the Chinese economy remain undisrupted, property prices will rise soon or later,” Shiang said.
However, Shiqiang admitted that small property developers in China are in difficult times at this time. He suggested that small developers in China merge with one another in order to survive.
Like Lo, office property developer Soho China spent US$500 million to buy ‘frustrating projects’ in central Beijing. The project was low priced because its developer had so big debts.
Many agree that 2008 is a difficult year for the Chinese property market. Data at the Chinese government shows a decline in property prices since January of this yea in a number of cities. In Shenzen, south of Guandong Province, developers easily bought land but they are very cautious at this time. Moreover, China’s largest developers – Vanke, China Merchants Property Development, Gemdale and Ply – have experienced a cash flow decline as disclosed by the 2007.
Determining factors
The decline in the US dollar value has caused flooding in ‘hot money’ speculations in China, notably in the property sector. Speculators who were less confident in the US money market expected a rise in the value of yuan. They also expected that inflation in China would forced China’s central bank to raise interest rates. The country’s foreign currency reached US$1.81 trillion, up from US$1.53 trillion in March 2008. Economic practitioners warned that speculative capitals had increased very drastically. This gave an alarm to developers to stay cautious.
The alarm became even louder when Beijing instructed banks to get stricter in providing credits after the US government bailed out two housing mortgage giants – Fannie Mae and Freddie Mac – in July. This indicated that the Chinese property market was in a critical condition. In 4Q-2007, real estate investments in china declined after the government increased land taxes that aimed to protect the property sector from foreign investors. At the end of June 2008, property prices in 70 cities in China rose 12 percent, but sales in large cities like Shanghai, Shenzen and Beijing fell drastically.
Pan Shiyi, chairman of property developer SOHO China, speaking in Boao Forum for Asia 2008 Annual Conference, said that the rise in interest rates and bank loans due to the implementation of tight monetary policy since five years ago had caused a rise in the prices of building materials, laborers’ wages and land prices, all at the same time. This had caused a drastic drop in the profits of real estate developers. “Money has become the top problem plaguing the capital-intensive real estate industry this year,” Pan Shiyi said.
The Chinese government has continued efforts to improve the condition of that country’s property sector. At this time, some improvement is visible although the condition has not totally returned to normal. The government has tried to stabilize prices. In anticipation for future development, the government will keep very strict control over the competition between local and foreign investors. Even, the government very clearly banned foreign investors to make investments in main cities in China, which aims to encourage investment climates in second or third levels like Chengdu, Chongqing and Hangzhoud. (NS)
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